Euphoria Sweeps China Stocks as Momentum Gauge Reaches 2015 High

  • Improving earnings, better economic data boosting optimism
  • Mainland inflows are helping to underpin the equity rally

What's Driving Global Market Optimism?

Chinese stocks are hot again.

The MSCI China Index has surged 13 percent from its December low, sending a momentum indicator to its highest level since April 2015, while the percentage of members trading above their 200-day moving average has climbed above 85 percent for the first time since the bubble burst almost two years ago.

Improving earnings in industries such as automakers, a pick up in economic growth and valuations that trail global peers are luring investors back to a market that’s burnt optimists before. Just last quarter the gauge sank about 7 percent as a slumping yuan and tighter liquidity had investors jostling for the exits. This time round, inflows from the mainland into Hong Kong are helping support the rally.

MSCI Inc.’s China gauge tracks 150 of the nation’s companies that have listings outside the mainland, including in Hong Kong and U.S. bourses. Among the biggest gainers since the index’s Dec. 23 low are automakers such as Geely Automobile Holdings Ltd., materials producers including Aluminum Corp of China Ltd. and Jiangxi Copper Co., and social media company Weibo Corp.

The index now trades within 1 percent of levels last seen in August 2015, when the nation’s equities were in a tailspin following an epic boom. Shares are again looking frothy, with the MSCI China’s 14-day relative strength indicator rising to 78.8 on Monday, above the 70 level that signals to some traders that stocks are overbought.

Still, as global funds look for bargains amid a worldwide equity rally, the MSCI China Index stands out. The gauge trades at about 14 times reported earnings, a 34 percent discount to the MSCI All-Country World Index. A stabilizing yuan is also boosting confidence, with the currency gaining about 1 percent against the dollar this year. The Chinese measure rose 0.8 percent on Monday in a fourth day of gains.

International investors put about $469 million into exchange-traded funds that buy Chinese and Hong Kong stocks in the two weeks through Jan. 27, according to data compiled by Bloomberg. Mainland funds have also been pouring into Hong Kong equities through the Shanghai and Shenzhen exchange links, with inflows this year totaling 34.1 billion yuan ($5 billion) at the end of last week.

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